I've just begun to look for a business and I'm a bit confused. My search has been focused with online business for sale listings. Each website seems to have different terminology for the profit of the business.
Answer: Great question! You're correct; there's no uniform terminology for the profit of a business between the various websites. Some may call it: EBITDA (earnings before interest, depreciation & amortization), Cash Flow, Sellers Discretionary Cash, Owner's Benefit, and a few others.
Regardless of the exact term, you'll always want to clarify and reconfirm the information with the seller/broker so that it's perfectly clear what numbers are included in the figure. EBITDA is not really applicable for a small business acquisition where you'll be replacing the owner, as this is simply a financial picture of a debt free business. Personally, I don't like the term Cash Flow -- it's not the same thing as profit, and many people are confused by this.
Cash Flow simply means the cash the business had at the beginning of a period, and what they had at the end, and what happened with the difference. The figure you'll want to determine is Sellers Discretionary Cash or Owner Benefits. This is the Pretax Profit of the business + Owner's Salary/Perks + Depreciation + Interest add backs. Pay special attention to Depreciation, For capital intensive businesses, you'll have to reduce this figure by any amounts you may need to purchase additional or replacement assets in the future.
|Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely
used reference resource and strategy guide for buying a business.
|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|